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Tax Reform

What is happening in Washington, DC? 

In each of his budgets US President Barack Obama has proposed raising taxes on US royalty owners and independent crude oil and gas producers drilling here at home – a move that would suffocate our economic recovery and make America more dependent on foreign oil. Wisely, both Democrat and Republican lawmakers have repeatedly rejected the President’s plan.

Now some in Congress are meeting behind closed doors on a tax plan they say would lower overall rates, which sounds good at first. However, in order to do so they are considering wiping out important deductions, things like the home-mortgage deduction, charitable deductions, and oil and gas tax provisions that have proved their merit for more than 80 years

While it’s impossible to know exactly what they’re cooking up, multiple reports have surfaced that your provisions are at-risk. They say tax deductions for percentage depletion, which is 15 percent of your royalty check, is on the chopping block along with the ability of independent producers to deduct their ordinary and necessary business expenses in the year they occur.

These moves hurt you and would cut the value of your minerals by curtailing homegrown energy production and reducing the number of leases and new wells drilled.

America is shaking off its dependence on foreign oil for the first time in a generation thanks to you and U.S. drillers. We now import only 40 percent of our daily petroleum needs. That’s down from more than 60 percent just a few short years ago. This homegrown energy boom is helping bring manufacturing jobs back to the United States and is lowering the cost of things that require a lot of energy to make. It’s making a positive difference in factories and farms from coast-to-coast.

Fortunately, we know some key lawmakers in these meetings see things like you do and are speaking up on your behalf. They need all the encouragement we can give them. If you don’t want Congress taking 15 percent or more of your royalty check, take a few minutes to call these friends and urge them to keep fighting for you.

Intangible Drilling Costs 

In order to recognize the high risks involved in drilling exploratory and developmental wells, taxpayers are allowed to make a binding one-time election to expense intangible drilling and development costs (IDC). This election generally permits an immediate write-off of expenditures that would otherwise be capitalized and amortized. However, integrated oil companies are required to capitalize 30% of their intangible drilling costs over a 5-year period. Foreign intangible drilling costs cannot be expensed.

Percentage Depletion

Compiled by Sarah Catalano, DEPA
Communications Project Manager

The existing tax code allows the deduction of percentage depletion from the net income of oil and natural gas wells to continue production, even when wells become marginal. Marginally-producing wells are unique to the onshore, domestic fossil fuel industry – other countries shut down small operations, and there are no offshore stripper wells. 

Percentage depletion is a complicated tax issue that is absolutely crucial to keeping marginal wells pumping.

“A change in existing law to deny percentage depletion could make many wells unprofitable on an after-tax basis and result in early abandonment (i.e. resources becoming shut in). Once shut down, marginal wells cannot be re-opened. A significant decline in marginal well production in the United States could increase the country’s dependence on imported energy, exacerbate the problem of the trade deficit, and again make the United States vulnerable to concerted political or market action by foreign producers.”